Enterprise Products Partners (NYSE:EPD) and Magellan Midstream Partners (NYSE:MMP) were among the very few MLPs that managed to keep distributions growing even in the most challenging commodity price environment. Both are trading at comparable yields. To decide which is better, it's important to understand how and why these two MLPs managed to grow and what the future holds for them.
Enterprise Products Partners' consistent growth
Enterprise Products Partners' pipeline transportation volumes rose about 5% to 10.4 million equivalent barrels per day in 2019. Its terminal volumes rose 17% for the year. Moreover, the company has been growing its volumes steadily over the years. Enterprise Products' transportation volumes have risen 23% from their 2014 levels.
What's more, Enterprise Products' volumes growth gets reflected in its cash flows, which have also seen a consistent rise over the years. This shows that despite the capacity overbuild, the company has pricing power. This is in part due to the strategic locations of its assets.
Another factor that helped Enterprise Products navigate the challenging environment is its conservative use of capital. While some of its peers, including Kinder Morgan (NYSE:KMI) and Energy Transfer (NYSE:ET), used a lot of debt to grow rapidly, both organically and through acquisitions, Enterprise Products adopted a more conservative approach. As a result, it didn't find itself in a fix when profits squeezed as a result of a fall in commodity prices.
Enterprise Products posted strong fourth-quarter results. It expects to raise its distributions by 2.3% in 2020 and spend $3 billion to $4 billion in growth projects during the year. The company uses only the cash it generates from operations to fund the capital portion of its growth projects. In short, not only has the company been growing, it is all set to keep growing in the future.
What's impacting Magellan Midstream Partners
Like Enterprise Products, Magellan Midstream is rightly credited for its strong and growing distributions. Magellan has historically traded at a lower yield compared to Enterprise Products Partners.
However, Magellan's yield came closer to Enterprise Products' toward the end of 2018. The rise in Magellan's yield can be attributed to its higher distribution growth rate as well as the underperformance of Magellan stock in roughly the last two years.
Due to the changes in the energy market, Magellan can obviously not continue raising its distributions at such high rates. The MLP's distribution growth slowed in 2019, likely impacting the stock. Further, Magellan expects slower growth in 2020. Despite it being lower than its historical rate, Magellan still expects an annual distribution growth of 3% for 2020.
The two MLPs now trade at nearly the same yields with expected distribution growths between 2% and 3%. The distributions are expected to be well covered with cash generated from operations. Enterprise Products intends to utilize the excess leftover cash from a lack of attractive opportunities toward buybacks. Magellan, on the other hand, is considering a special distribution in addition to buybacks.
While Enterprise Products Partners' project backlog looks more robust, Magellan has more than $500 million of capital projects under consideration. The company's $400 million expected capital expenditure for 2020 relates only to projects currently under progress. So, the lower expected capital expenditure is not necessarily a reason of concern, as Magellan is used to providing estimates separately for projects in progress versus potential ones.
The winner is...
There is no denying that both Enterprise Products and Magellan Midstream offer rock-solid yields. Both the stocks have outperformed the S&P 500 energy stocks in terms of total returns. But income investors seek yield to generate positive total returns. Yield returns aren't attractive if they get offset by capital loss. That's what has happened to energy investors in the last few years.
In five years, Enterprise Products generated total returns of just 3%, while Magellan's total returns stand at -3%. That means, while investors got their distributions, the market value of their EPD and MMP stock holdings has gone down, resulting in negligible to negative total returns.
Moreover, I don't see any immediate catalysts to change this situation anytime soon. So, if you're looking for higher total returns over the next couple of years, neither of the two stocks fits the bill. However, if you intend to keep stocks for a real long term and just use distribution income, both stocks look equally well placed.